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March 18, 2013

El-Erian on Cyprus: ‘Europe Lit Two Sticks of Dynamite’

PIMCO CEO doesn’t think much of the island’s plan to tax bank deposits

Mohamed El-Erian, CEO of PIMCO. (Photo: AP)

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“You are welcome, sir, to Cyprus—Goats and monkeys!”

The famous line from Othello means the Bard understood the tenuous political and financial situation that marks the small island nation long before anyone else. But even he might not have imagined current events. It’s so bad it risks social unrest, according to PIMCO CEO Mohamed El-Erian.

"Europe lit the fuse of two sticks of dynamite on Saturday,” El-Erian told CNBC’s “Squawk Box” on Monday. “One is very clear. By including small depositors, they are risking social unrest, political disorder, and an exit from the eurozone."

At issue is the bailout proposal to tax bank savers in Cyprus, which the network says calls into question the "sanctity of bank deposits in Europe."

El-Erian added that small depositors should be exempt, and that's exactly what Cypriot ministers are trying to do ahead of a Tuesday parliamentary vote.

"The other stick of dynamite that's been lit is much more complicated and more uncertain," El-Erian added. "That is a question mark about the sanctity of bank deposits in Europe. And a reminder that Europe has too many objectives and too few instruments." He said he thinks the political system there is "failing Europe."

The weekend announcement that Cyprus would impose a tax on bank accounts as part of a $13 billion bailout by the European Union broke with previous practice that depositors' savings were off limits, according to CNBC.

The government claims Cyprus has no choice but to accept the bailout with the tax on deposits, or go bankrupt.

As for a possible run on banks in Cyprus or in Europe, "It's really good news that it hasn't happened," El-Erian told the network, "because a bank jog or a bank run is really difficult to contain because it becomes rational to join it once it starts." But he added that he thinks "it's too early to declare victory."